Consolidated Financial Statements Standards — Practice

Question 1

State the method required for each and the reason: (a) H Ltd holds 70% of S Ltd; (b) H Ltd holds 30% of A Ltd, sits on its board and participates in policy decisions; (c) H Ltd holds 50% of J Ltd under a shareholders' agreement requiring unanimous consent for strategic decisions; (d) H Ltd holds 8% of P Ltd with no board seat.

Accepted Answer

In (a) H Ltd owns more than one half of the voting power and therefore has control, so S Ltd is a subsidiary and is consolidated line by line under AS 21, with minority interest shown separately for the 30 per cent it does not own. In (b) H Ltd holds 30 per cent, so significant influence is presumed under AS 23, and the presumption is reinforced by board representation and participation in policy-making; A Ltd is an associate and is accounted for by the equity method in the consolidated financial statements. In (c) the shareholders' agreement requiring unanimous consent for strategic decisions establishes joint control, since no single venturer can unilaterally control the activity; J Ltd is a jointly controlled entity and is reported by proportionate consolidation under AS 27, with no minority interest because only H Ltd's own share is brought in. In (d) H Ltd holds well below 20 per cent with no board seat and nothing to rebut the presumption, so there is no significant influence; the holding is a simple investment accounted for under AS 13 at cost or lower of cost and fair value according to whether it is long-term or current. The organising point is that the relationship dictates the method, and identifying it is the whole of the difficulty.

Question 2

A Ltd holds 40% of the equity of B Ltd but, under the articles, is entitled to appoint five of B Ltd's nine directors. Its finance director says consolidation is not required because the holding is below 50%. Advise, and state the only two grounds on which a subsidiary may be excluded from consolidation.

Accepted Answer

Consolidation is required. AS 21 defines control in two limbs, not one: the ownership, directly or indirectly through subsidiaries, of more than one half of the voting power of an enterprise; or control of the composition of the board of directors or corresponding governing body so as to obtain economic benefits from its activities. A Ltd fails the first limb but satisfies the second squarely, since the right to appoint five of nine directors is control of the composition of the board, and through it A Ltd can direct B Ltd's activities and obtain economic benefits. B Ltd is therefore a subsidiary and must be consolidated, with a 60 per cent minority interest shown separately. The finance director's error is treating control as a shareholding test, which it is not. As to exclusion, AS 21 permits it in only two cases: where control is intended to be temporary because the subsidiary is acquired and held exclusively with a view to its subsequent disposal in the near future, and where the subsidiary operates under severe long-term restrictions which significantly impair its ability to transfer funds to the parent. An excluded subsidiary is accounted for under AS 13. Dissimilar activities are expressly not a ground for exclusion.

Question 3

H Ltd acquired 80% of S Ltd on 1 April 2025 for ₹340 lakh. On that date S Ltd's share capital was ₹250 lakh and its reserves were ₹120 lakh. By 31 March 2026 S Ltd's reserves had grown to ₹200 lakh. Compute goodwill, minority interest and the amount of S Ltd's reserves entering consolidated reserves.

Accepted Answer

S Ltd's net assets at acquisition were share capital of 250 plus reserves of 120, that is 370 lakh. The parent's share is 80 per cent of 370, that is 296 lakh. Goodwill is the cost of investment less the parent's share of net assets at the date of acquisition, that is 340 less 296, which is 44 lakh, presented as an asset in the consolidated balance sheet. Post-acquisition reserves are 200 less 120, that is 80 lakh, being profits earned after H Ltd took control. Of these the parent's share is 80 per cent, that is 64 lakh, and this alone is added to consolidated reserves. Minority interest is the minority's share of the subsidiary's equity at acquisition plus their share of post-acquisition movements: 20 per cent of 370, that is 74 lakh, plus 20 per cent of 80, that is 16 lakh, giving 90 lakh, presented separately from liabilities and from the parent shareholders' equity. The pre-acquisition reserves of 120 lakh appear nowhere in consolidated reserves, and this is the point most often got wrong. H Ltd paid for those reserves as part of what it bought, so they have already been absorbed into the goodwill computation; adding them to consolidated reserves as well would count them twice.

Question 4

Explain from first principles why reserves must be split into pre-acquisition and post-acquisition on consolidation, and what goes wrong if the split is not made.

Accepted Answer

When a parent acquires a subsidiary it pays for the net assets as they stand at that date, and those net assets include whatever reserves the subsidiary has already accumulated. The price reflects them: a subsidiary with large accumulated profits costs more than an otherwise identical one without. Pre-acquisition reserves are therefore part of what was bought, capital to the group rather than earnings of the group, and they enter the goodwill computation, where they reduce the goodwill that would otherwise arise. They do not appear in consolidated reserves, because the group did not earn them — they were earned by the subsidiary before it was part of the group, on behalf of the shareholders who then sold it. Post-acquisition reserves are different in kind: they are profits earned while the subsidiary was under the parent's control, so they are the group's earnings, and the parent's share is added to consolidated reserves while the minority's share is added to minority interest. If the split is not made, pre-acquisition profits are counted twice — once through the reduced goodwill figure and again in consolidated reserves — which overstates group reserves and the group's distributable position, and misrepresents earnings that the group never made as though it had made them.

Question 5

H Ltd owns 75% of S Ltd. During the year S Ltd sold goods costing ₹40 lakh to H Ltd for ₹60 lakh. At the year end H Ltd still holds one quarter of these goods. Compute the elimination and state how it is shared. How would the answer differ if H Ltd had been the seller?

Accepted Answer

The profit on the whole sale is 60 less 40, that is 20 lakh, at a margin of one third of selling price. One quarter of the goods remains in stock, so the unrealised profit still embedded in inventory is one quarter of 20, that is 5 lakh. From the group's point of view nothing has been sold, since the goods have merely moved from one group company to another, so the 5 lakh must be eliminated in full: inventory is reduced by 5 lakh and consolidated profit is reduced by 5 lakh. The question of sharing arises because the seller was the subsidiary, whose profit is shared between the parent and the minority. The 5 lakh is therefore borne 75 per cent by the parent, that is 3.75 lakh charged against consolidated reserves, and 25 per cent by the minority, that is 1.25 lakh deducted from minority interest, because the minority shared in the subsidiary's recorded profit that is now being reversed. Had H Ltd been the seller, the whole 5 lakh would be borne by the parent and charged against consolidated reserves, with no adjustment to minority interest at all, since the profit being reversed was the parent's own and the minority never shared in it. AS 21 requires unrealised profits to be eliminated in full; unrealised losses are also eliminated unless cost cannot be recovered.

Question 6

A parent has a 31 March year end. One subsidiary reports to 31 December and another uses a different depreciation policy. State what AS 21 requires in each case.

Accepted Answer

On reporting dates, AS 21 provides that the financial statements used in the consolidation should ordinarily be drawn up to the same reporting date. Where it is not practicable to do so, statements drawn up to different reporting dates may be used provided the difference between the reporting dates is not more than six months, and adjustments must be made for the effects of significant transactions or other events occurring between those dates and the date of the parent's financial statements. A subsidiary reporting to 31 December is three months apart, within the six-month limit, so its statements may be used with adjustment for significant intervening transactions, and the fact and the reporting date must be disclosed. On accounting policies, AS 21 requires consolidated financial statements to be prepared using uniform accounting policies for like transactions and other events in similar circumstances. Where a group member uses different policies, appropriate adjustments should be made to its financial statements when they are used in preparing the consolidated statements. If it is impracticable to make such adjustments, that fact must be disclosed together with the proportions of the items in the consolidated financial statements to which the different accounting policies have been applied.

Question 7

Discuss whether significant influence exists: (a) X Ltd holds 25% of Y Ltd, whose remaining 75% is held by a single owner hostile to X, with no board seat and no participation in policy; (b) X Ltd holds 15% of Z Ltd, with a board seat, contractual participation in policy decisions and interchange of managerial personnel.

Accepted Answer

AS 23 defines significant influence as the power to participate in the financial and operating policy decisions of the investee but not control over those policies, and it establishes a presumption based on holding: significant influence is presumed where the investor holds, directly or indirectly through subsidiaries, 20 per cent or more of the voting power, unless it can be clearly demonstrated that this is not the case; and it is presumed not to exist below 20 per cent, unless significant influence can be clearly demonstrated. The presumption is rebuttable in both directions, which is what these two fact patterns test. In (a) the 25 per cent holding raises the presumption, but the facts rebut it: a single hostile owner of 75 per cent can carry every resolution, X has no board representation, and there is no participation in policy-making, so X has no power to participate in the relevant decisions and Y Ltd is not an associate. In (b) the 15 per cent holding raises the opposite presumption, but the facts clearly demonstrate significant influence: board representation, participation in policy-making processes and interchange of managerial personnel are three of the indicators AS 23 itself names, the others being material transactions between the parties and the provision of essential technical information. Z Ltd is therefore an associate accounted for by the equity method.

Question 8

P Ltd acquired 30% of Q Ltd on 1 April 2024 for ₹150 lakh when Q Ltd's net assets were ₹420 lakh. Q Ltd earned ₹80 lakh in 2024-25 and paid a dividend of ₹30 lakh. In 2025-26 it lost ₹60 lakh. Compute the carrying amount at each year end and identify the goodwill.

Accepted Answer

Under the equity method the investment is initially recorded at cost of 150 lakh. The goodwill embedded in that cost is the excess of cost over the investor's share of net assets at acquisition, that is 150 less 30 per cent of 420, which is 150 less 126, giving 24 lakh; AS 23 requires this to be identified and disclosed separately although it remains included in the carrying amount of the investment. For 2024-25, the carrying amount is increased by the investor's share of post-acquisition profits, 30 per cent of 80, that is 24 lakh, and reduced by distributions received, 30 per cent of 30, that is 9 lakh. The carrying amount at 31 March 2025 is 150 plus 24 less 9, that is 165 lakh. For 2025-26, the share of losses is 30 per cent of 60, that is 18 lakh, so the carrying amount at 31 March 2026 is 165 less 18, that is 147 lakh. Two points of principle are worth stating alongside the arithmetic. The dividend reduces the carrying amount rather than being income, because the profit it distributes has already been taken up through the share of results, and recognising it again would double count. And losses are recognised only to the extent of the carrying amount: had the losses exhausted the 165, recognition would stop at nil, with further losses recognised only to the extent of obligations incurred or payments made on the associate's behalf.

Question 9

An investor's equity-accounted investment in an associate stands at ₹40 lakh. The associate reports losses giving the investor a share of ₹95 lakh. In the following year the associate returns to profit with the investor's share being ₹70 lakh. The investor has guaranteed ₹10 lakh of the associate's borrowings. Explain the accounting in both years.

Accepted Answer

In the loss year the investor recognises its share of losses only to the extent of the carrying amount. The 40 lakh carrying amount is reduced to nil, absorbing 40 of the 95 lakh share of losses, and recognition of the further 55 lakh is discontinued, the investment being reported at nil. The guarantee is dealt with separately: additional losses are provided for to the extent that the investor has incurred obligations or made payments on behalf of the associate, so the guaranteed 10 lakh is recognised as a liability, taking the total recognised to 50 lakh and leaving 45 lakh of the investor's share of losses unrecognised. The rationale for stopping at the carrying amount is that an equity-accounted investment is not a consolidation: the investor has no obligation to fund the associate's losses beyond what it has invested or promised, so continuing to write down past nil would recognise a liability the investor does not have. In the following year the investor resumes recognising its share of profits only after its share of profits equals the share of net losses not recognised. Of the 70 lakh share of profits, 45 lakh is absorbed against the unrecognised losses and only the remaining 25 lakh is recognised, taking the carrying amount from nil to 25 lakh, with the 10 lakh liability released as appropriate.

Question 10

A company with no subsidiaries holds 35% of another company and participates in its policy decisions. Its accountant proposes to apply the equity method in the company's own financial statements. Advise, and state the two situations in which the equity method is not applied even in consolidated statements.

Accepted Answer

The proposal is wrong. AS 23 applies the equity method only in consolidated financial statements. In an investor's separate financial statements, an investment in an associate is accounted for in accordance with AS 13, that is at cost if it is a long-term investment, subject to provision for a decline other than temporary, or at the lower of cost and fair value if it is a current investment. A company that has no subsidiaries prepares no consolidated financial statements at all, and therefore does not apply the equity method anywhere; the 35 per cent holding is simply carried under AS 13. This surprises candidates because the influence is real and the equity method would arguably be more informative, but the standard's scope is explicit and the reasoning is that the equity method is a consolidation technique, presenting the group's economic interests, and there is no group here. As to the exclusions, the equity method is not applied even in consolidated statements in two situations: where the investment is acquired and held exclusively with a view to its subsequent disposal in the near future, and where the associate operates under severe long-term restrictions that significantly impair its ability to transfer funds to the investor. In both cases AS 13 applies instead. These mirror the AS 21 exclusions for subsidiaries.

Question 11

Define joint control and explain why a 50% holding does not by itself create it. Name the three forms of joint venture recognised by AS 27.

Accepted Answer

AS 27 defines a joint venture as a contractual arrangement whereby two or more parties undertake an economic activity which is subject to joint control, and joint control as the contractually agreed sharing of control over an economic activity. The defining feature is that no single venturer is in a position to unilaterally control the activity: strategic financial and operating decisions require the consent of the venturers sharing control. A 50 per cent holding does not by itself create joint control because joint control arises from the contractual arrangement, not from the shareholding. Two shareholders each holding 50 per cent with no agreement between them are in a deadlock, not a joint venture, and neither has control; depending on the facts each may have significant influence and account for the other's company as an associate. Conversely a contractual arrangement may establish joint control at a much lower holding, since what matters is the agreed requirement for consent. The three forms are jointly controlled operations, which use the venturers' own assets with no separate entity; jointly controlled assets, involving joint control and often joint ownership of assets contributed to or acquired for the venture; and jointly controlled entities, which involve the establishment of a separate entity such as a company or partnership and are the form requiring a consolidation method.

Question 12

V Ltd holds a 40% interest in a jointly controlled entity whose assets are ₹500 lakh, liabilities ₹300 lakh, income ₹250 lakh and expenses ₹190 lakh. State what V Ltd brings into its consolidated financial statements and explain why no minority interest arises, contrasting the position with AS 21.

Accepted Answer

Under proportionate consolidation V Ltd combines its share of each of the assets, liabilities, income and expenses of the jointly controlled entity with the similar items, line by line, in its own consolidated financial statements. It brings in 40 per cent of assets, that is 200 lakh; 40 per cent of liabilities, that is 120 lakh; 40 per cent of income, that is 100 lakh; and 40 per cent of expenses, that is 76 lakh, contributing 24 lakh to consolidated profit. Any goodwill or capital reserve arising on the acquisition of the interest is identified and treated in accordance with AS 21 principles. No minority interest arises, and the reason is structural rather than arithmetical. Under AS 21 a parent controls the whole of the subsidiary, so it consolidates 100 per cent of every line and must then show, as minority interest, the portion of those consolidated net assets and results belonging to others. Under AS 27 the venturer controls only its own share, so it brings in only its own share; there is nothing belonging to anyone else inside the numbers, and therefore nothing to disclose as a minority. The three methods form a sequence that tracks the degree of control: full consolidation with a minority for control, proportionate consolidation for joint control, and a single line under the equity method for significant influence.

Question 13

A venturer holding a 30% interest sells an asset costing ₹80 lakh to its jointly controlled entity for ₹120 lakh. Separately, in another year, it sells an asset for ₹50 lakh whose net realisable value has fallen to ₹45 lakh. State the treatment of the gain and the loss, and the treatment where the venturer buys an asset from the joint venture.

Accepted Answer

On the sale at a gain, AS 27 requires the venturer to recognise only that portion of the gain or loss which is attributable to the interests of the other venturers. The gain is 120 less 80, that is 40 lakh, of which 70 per cent, being 28 lakh, is attributable to the other venturers and is recognised; the remaining 30 per cent, being 12 lakh, is attributable to the venturer's own interest and is unrealised, since to that extent the venturer has sold to itself, and it is eliminated. On the loss, the treatment is deliberately asymmetric: the venturer recognises the full amount of any loss where the contribution or sale provides evidence of a reduction in the net realisable value of the asset or an impairment loss, so the whole 5 lakh is recognised rather than 70 per cent of it. The asymmetry is prudence, and the reasoning is that a sale below net realisable value is evidence that the asset was impaired in the venturer's own hands, which is a fact about the asset rather than an artefact of the transaction. Where the venturer purchases assets from the joint venture, it does not recognise its share of the profits of the joint venture from the transaction until it resells the assets to an independent party, applying the same principle from the other side.

Question 14

Set out the logic connecting the three methods — full consolidation, proportionate consolidation and the equity method — to the three relationships they serve, so that the method can be derived rather than recalled.

Accepted Answer

The connecting idea is that the accounting mirrors the degree of control, because the question in every case is what the investor is entitled to direct. Where there is control, the parent directs all of the subsidiary's assets and can deploy them as it chooses, so it accounts for all of them line by line and then discloses, as minority interest, the portion of those net assets and results that belongs to others; anything less would conceal assets and liabilities the parent actually commands. Where control is shared, each venturer directs only its own share and no venturer can act unilaterally, so each brings in only its share of every asset, liability, income and expense, and there is no minority to disclose because nothing belonging to anyone else has been brought in. Where there is significant influence but not control, the investor directs nothing at all; it cannot deploy any of the associate's assets, and consolidating them would assert a command it does not have. So it takes only its share of results into a single line, adjusting the carrying amount of the investment. Read this way the three methods are not three techniques to be memorised but one principle applied at three levels of control, which is why the classification carries the difficulty and the arithmetic follows.

Question 15

Set out the four steps of the consolidation procedure under AS 21 in order, and state what is eliminated at each step and why.

Accepted Answer

Step one is to combine like items: the assets, liabilities, income and expenses of the parent and the subsidiary are added together line by line, on the footing that the group is being presented as if it were a single entity. Step two is to eliminate the parent's investment against its portion of the subsidiary's equity at the date of acquisition, the difference being goodwill if the cost exceeds the share of net assets and capital reserve if it falls short. This step exists because the investment and the underlying net assets are the same thing viewed from two sides, and carrying both would double count. Step three is to compute and present minority interest, being that part of the net results of operations and of the net assets of the subsidiary attributable to interests not owned by the parent, shown separately from liabilities and from the parent shareholders' equity; it is not a liability, because the group owes the minority nothing, and it is not parent equity either. Step four is to eliminate intra-group balances and transactions together with the resulting unrealised profits, in full, because a group cannot trade with itself and any profit on such a transaction has not been earned from anyone outside the group. Unrealised losses are also eliminated unless cost cannot be recovered.

Practice — Consolidated Financial Statements Standards

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